Pensions, Social Security, and Savings

Abstract

Pensions and Social Security play an important role in determining U.S. savings rates. As the personal savings rate fell to a low of 4.3 percent of personal disposable income in 1987 from an average rate of 7.8 percent in the 1970s, the contribution of these retirement income programs has assumed increasing importance. Employment-based pensions paid retirees $234 billion in 1990. Retirement income programs are closely related to demographic changes projected to occur in the next century, including an increase in the proportion of elderly persons in the population, a gradual decline in the fertility rate, and a longer average life span. These demographic changes will produce a higher ratio of persons aged 65 and over per 100 persons aged 18–64, which may increase the need for retirement income.

The Social Security system plays an important role in individual savings decisions and retirement income. In 1979 and 1983, Congress revised the system's benefit levels, scheduled tax rates, and future retirement age in order to maintain solvency and to prepare to pay for the baby boom generation's retirement benefits. Social Security paid cash retirement benefits totaling $168 billion in 1990.

Several studies have investigated the effects of individual retirement accounts (IRAs) on savings. Analysts have found that some portion of IRA contributions represent new savings. The Employee Benefit Research Institute estimates that a portion of 401(k) contributions do also; 401(k) contributions by employees reached nearly $25 billion in 1988.

During the 1980s, Congress changed some aspect of the retirement system almost annually. Future legislation affecting pensions and the Social Security system should be considered in terms of its effect on savings and economic security in retirement.